Payroll Issues for the Manufacturing Industry

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By Dave Foxall

Sector-Specific Payroll Factors for Manufacturing

As in most industries, organizations in the manufacturing sector have different pay scales for different roles—from management to machine operators to packers and shippers. However, unlike some other industry-specific payroll administration issues, the manufacturing sector can hold unique challenges such as differing pay cycles for workers, varying rate calculations, and of course the problems that can come with a highly contingent labor force. Further, add on the need to be able to break down labor costs against component production tasks (to establish process efficiencies), and it becomes clear that any payroll software or service that handles manufacturing must be greatly specialized.

For these reasons, it’s not surprising that the rate of payroll automation is high (89% for high-tech and 97% for general manufacturing according to CedarCrestone). After all, the payroll complexities that are hallmarks of the manufacturing industry are nightmarish at best when conducted manually. Even so, precious little information has been published to date that helps guide those manufacturing-based organizations looking to introduce or even upgrade their payroll software or service—leaving far too many companies in the dark about the payroll issues they need to be aware of. As such, we’ve compiled a list of what we feel are the key payroll factors manufacturing organizations should know.

Manufacturing Industry Payroll Issue #1: Union Reporting

In addition to the usual federal, state, and local labor laws, the manufacturing sector has a high proportion of unionized labor. Depending on the workforce and the degree of union involvement, some employers will operate on an “open” or “merit shop” basis; while others may be entirely “closed”—employing only those people that are union members. These differences could well equate to the fact that the organization’s payroll function may need to be: deducting union dues from salaries before payment; drawing up payroll reports for the union itself; or making union contributions on the company’s behalf. This added layer of payment and reporting compliance demands a payroll software solution (and process) that can generate the necessary payroll reports.

While an accurate reconciliation between payroll and time and labor data ensures pay-slip accuracy in any industry, workforce management systems for the manufacturing sector are extremely specialized—offering opportunities for cross-referencing and reporting that can provide deep insight into performance and cost control. However, not all systems are equally effective. In fact, an IDC Manufacturing Insights report (You Can’t Manage What You Don’t Measure) notes that most ERP software data can only be used to compute average values for hourly labor cost, labor productivity, and the labor component of the cost of goods. On the other hand, a manufacturing execution system (MES) may provide more detailed scheduling data but is rarely designed for cost control activities. Ideally then, what is needed is a workforce management solution that can track individual worker activity across multiple lines (and positions)—integrating fully with payroll to provide metrics on issues such as the true cost of labor on products, payroll accuracy, the root cause of scrap generation, and the cost of reworking.

Manufacturing Industry Payroll Issue #3: Access to Self-Service

According to a Bloomberg BusinessWeek report on mobile HR apps, 57% of manufacturers offer employee self-service (ESS) access to payroll and benefits information; mainly as a means of personal access to an electronic pay-slip. However, this leaves a sizeable population of employers that have not deployed ESS functionalities. Interestingly enough when it comes to these ESS laggards, a Carval report (Payroll: Reducing Paper Output With E-Pay-slips) points out that, “A common argument [these] companies have for not implementing electronic pay-slips is that some or all of their employees…do not use computers or have access to the internet.” Indeed, this question of ease of access (while important for all industries without desk-bound employees) is particularly relevant to the manufacturing industry. Even for those organizations that have deployed ESS software applications, far too often employers rely on the fact that employees may have access to the internet outside of work. As such, for workplace access to these payroll technologies, companies should look to offerings such as kiosks (or easily-accessible terminals) to ensure all employees have the opportunity to retrieve their personal information.

Manufacturing Industry Payroll Issue #4: Outsourcing

A growing number of manufacturing businesses are beginning to rely on third party service providers to handle their complex payroll operations. Increasingly, industry-specific providers are choosing to specialize and offer manufacturing-focused services—delivered by personnel with sector-relevant qualifications. While the usual payroll functions of tracking hours, calculating pay, depositing employee checks, withholding employee taxes, and remaining compliant with federal, state, and local legislation are covered; providers are also offering more tailored services such as:

Job hour tracking;

Union compliance and reporting;

Workers compensation;

Certified payroll;

New hire reporting; and

Government contractual obligations

As is the case with most outsourced choices though, the key driver behind manufacturing-centric payroll administration outsourcing is the ability for the client organization to focus scarce resources on core business activities.

Managing Payroll in the Manufacturing Industry – Final Thoughts

Although the basic principles of payroll management are universal, the manufacturing sector has unique elements that any viable payroll software or service must be able to handle. Indeed, the issues of unionized labor, self-service access, wider system integration, and (where appropriate) specialized outsourcing are all critical to accurate and compliant payroll operations. As such, business-savvy manufacturing organizations would do well to heed the above advice before settling on a specific course of action.

While an accurate reconciliation between payroll and time and labor data ensures pay-slip accuracy in any industry, workforce management systems for the manufacturing sector are extremely specialized—offering opportunities for cross-referencing and reporting that can provide deep insight into performance and cost control.